Economics, Politics, Social Commentary and occasionally Superstring Theory.

Wednesday, April 13, 2005

The IMF Overstepping Its Bounds

Reuters has it that the IMF is insisting that Argentina negotiate with the hold-outs of the country's recent debt swap. If there is a better way to reinforce the idea that the IMF is the puppet of wealthy creditors, I can't think of it.

A brief catch-up. Argentina defaulted on billions of dollars in debts. Some of this debt is owed to private creditors, such as banks, bondholders, etc. Other parts of the debt is actually owed to the IMF. Argentina defaulted on both of these forms of debt.

Recently, Argentina imposed its own sort of sovereign bankruptcy proceeding. It offered the holders of the bonds it had defaulted on a new bond for about 30% of face value. It then set a deadline for accepting the new bond and threatened that those who had not accepted by the deadline would be left with bonds that Argentina would never pay. About 3/4 of the bondholders agreed to the swap.

After the completion, Argentina began to focus on its debt to the IMF. However, the IMF has told Argentina that it must have a strategy to deal with the holdout bondholders before any restructuring of IMF debt can be considered.

Make no mistake: The IMF does not hold any of the bonds that Argentina defaulted on. It has no financial stake in the bond process whatsoever. Its role is merely to give advice on impose conditions that will put Argentina back on a path to economic growth and fiscal responsibility.

If Argentina was in trouble of scaring off a flow of foreign investment due its bond swap, then the holdout strategy might be a valid condition. But no such danger exists. Argentina is running surpluses and posting solid growth. Furthermore, the IMF bent over backwards to lend Argentina money during the run-up to its crisis. Where was this tight-fisted conditionality when Argentina was running off a financial cliff and the IMF knew it? The IMF could see that the dollar peg was unsustainable, and yet it continued to throw money at Argentina in an attempt to save it. It is irresponsible for the IMF to dig the hole Argentina fell into and to then step on its fingers as the country tries to dig itself out.

It bears repeating: The IMF has no stake in the private bond swap. It has no business demanding Argentina address the holdouts. All this demand accomplishes is the reinforcement of the image of the IMF as puppet to Wall Street. President Kirchner is right to face them down.

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